Cash Flow Strategy 101: How to Manage Your Cash Flow?

How to Manage Cash Flow

Your cash flow strategy is a relative measure of your business profitability! Manage your cash flow efficiently with these five tricks.

“The three most dreaded words in the English language are ‘negative cash flow.’ – David Tang, a businessman, and philanthropist.

One of the biggest nightmares for any small business owner would be to have a negative cash flow. Even if the business is profitable, a negative cash flow can create problems for you to sustain your business.

So, how do you manage your cash inflow and outflow more efficiently and ensure a positive cash flow?

We have five easy-to-implement tips for you that will help you understand your cash flow strategy and its importance. These tips will also help you understand the areas where you can focus more to maintain desirable cash in & cash out in your business.

Understanding the Cash Flow Management 

Cash is the king and your business cash flow management is crucial for your business growth.

Your business cash flow is the money you receive in your hand or in the bank and the money you actually pay. It is important to note that in a small business, you will have credit sales or purchases. Anything that is done without the exchange of cash is not considered cash outflow or inflow.

Hence, your cash inflow and outflow consists of only those transactions that involve cash inflow or outflow. For example, paying AED 1,000 subscription fees to a business newsletter via bank transfer is your cash outflow.

But why should you manage your business cash inflow and outflow? What is its importance? Let’s look at your cash outflow and inflow management’s impact on your business.

Impact of the Cash Flow Management on Your Business

Managing cash inflow and outflow is not everyone’s cup of tea, but with the right approach, you can be more efficient in maintaining a positive cash flow. Let’s see the importance of cash flow management on your business:

– Cash flow is the liquidity measure of the business. It tells you how much amount of money on hand you have in your business to deal with emergency requirements.

– It is a crucial element of working capital management since your working capital tells you how much amount of cash you generate and consume. You should receive more cash than you spend.

– It indicates how much in-hand revenue you have in your business. When you make sales, not all sales are made in cash, some of your sales income is earned after certain months. Thus, the cash flow management will provide you with how much cash you received from the sales you made and how much cash is yet to receive for which the sales are already done.

– The cash flow management strategy will help you manage business finance more effectively. Because when your cash inflow and outflow is well-managed, you will have more scope to improve on the other parts of your business finances.

– The efficient management of your cash inflow and outflow will ensure smooth cash inflow to your business. If you know how to manage your cash inflow and outflow, you will find it easier to maintain a positive cash inflow.

Thus, cash flow management is crucial for the sustainability and growth of your business. Let’s deep dive into the five tips to manage your cash flow efficiently for your small business.

Cheers to Cash Flow

5 Cash Flow Management Tips for Small Businesses and Startups

To understand the profitability of your new startup, just look at your business cash flow, and it will tell you how your business is growing financially. Below are five cash flow management tips to help you improve your cash inflow and outflow and maintain positive cash flow for your business.

1. Be Consistent in Bookkeeping

Yes, bookkeeping streamlines all financial transactions in your business, and it will help you better understand your cash inflow and outflow. When you regularly record accounting entries and be consistent in bookkeeping, you can quickly generate your cash inflow and outflow statement and make further decisions to manage the cash inflow and outflow.

Read Bookkeeping 101: Essential Guide For Startups & SMBs to know more about how to record accounting entries.

2. Project Your Profits

Always predict how much profit you will make in a financial year by projecting your sales and expenses. Projecting your income and expenses will give you a fair idea of an estimated profit for the year, which will help you implement effective cash inflow and outflow management strategies.

Tip: It is a good practice to prepare projected financial statements to implement an effective cash flow management strategy. It will help you make informed decisions on the cash outflow and inflow of your business.

3. Recover Fast, Pay Slow 

One of the best practices to manage cash inflow and outflow and ensure a positive cash inflow is to recover fast and use as much credit as possible. It means you must efficiently manage your invoicing and recover from your customers.

You also need to use credit periods your creditors allow you to pay their invoices. When you follow this strategy, you will easily maintain a positive cash inflow

4. Assess and Analyze Your Cash Flow

Once you have projected your profits, you also need to project the cash inflow and cash outflow for your business. Assessing your cash inflow and outflow will help you better understand your business’s cash inflow and outflow patterns. It will also help you manage your cash in and out in the most structured manner.

How to effectively assess the cash outflow?

– Review cash inflow and cash outflow from operating activities such as sales, purchases, etc.

– Analyze cash inflow and outflow from investing activities such as buying or selling a fixed asset or other investments.

– Consider cash flow from financing activities such as loan repayment, raising funds, etc.

5. Optimize Use of the Credit Facilities

When you plan to buy big machinery or software for your business, consider borrowing money through loans or other forms of credit facilities. They will allow you to pay in installments and save you from a huge cash outflow.

Thus, it will avoid the instant cash draining at the time of purchase, and you will be saved from a negative cash flow.

Manage Your Business Finances Efficiently

You can automate your bookkeeping and invoicing with Xpence and stay ahead of managing your cash inflow, outflow, and business finance more efficiently. The auto bookkeeping feature allows you to input only minimum information, and the bookkeeping will be done automatically.

How to Issue an Invoice and Get Paid?

You have started your new business and have delivered projects or goods to your clients or customers. You will now have to send them a proforma invoice for your work or the goods you sold.

But, how do you prepare an invoice? What information should you put into it?

Understanding the purpose of the invoice and its types will not only help you prepare a well-drafted one but help you get paid faster. 

This blog explains all you need to know about an invoice, including its types, purpose, and tips to help get paid more quickly.

What is an Invoice?

An invoice is a bill that describes the services you provided or items you sold to the buyer requesting payment. It is a document that lists out the items you have charged to the customer and the value-added tax (VAT) charged, if applicable.

It is a crucial part of the bookkeeping and tax filing since it serves as legal documentary evidence of the goods sold or services provided.

So, why do you need to issue an invoice? Let’s understand the purpose for which invoices are issued. 

Purpose of Issuing Invoice

A preliminary purpose of issuing an invoice is to inform your client or customer about his purchases and notify him to make the payment. Apart from this, the invoice serves the following multiple purposes:

– It helps you easily track your sales transaction.

– It enables faster recovery of your payment.

– It serves the purpose of record maintenance for accurate bookkeeping.

– It allows you to adhere to the law since issuing an invoice for the sales transaction is the requirement of the VAT law in the UAE.

– It ensures smooth tax filing since invoices evidence all your sales transactions.

Types of Invoices

Although there is one standard format to issue invoices to your client, you should prepare it considering the purpose behind issuing your bill. It will ease your efforts and help you get paid accordingly. 

You can issue it either manually or electronically. Hence, based on their medium of issuance there are two types:

1- Manual/Paper Invoice

Manual/paper invoices are those that you prepare manually in an invoice diary or a spreadsheet on a computer and fill in the details from scratch. 

2- Electronic Invoice

E-invoices are generated electronically using computer software or program that helps you fill in certain segments (address, invoice numbers, tax amount, amounts in words, etc.) automatically. 

Invoice Formats

Invoice formats can be standard, tax invoices, simplified invoices, or proforma invoices. Based on the purpose of issuance, let’s learn which types of invoices.  

1- Tax Invoices

It is a standard format that includes basic customer details and comprehensive details about the tax applicable. Such as

– The buyer’s name and address

– VAT registration number

– Your (seller) name and address

– VAT number

– VAT rate

– The VAT amount in words and numbers

– A label ‘Tax Invoice’ on the top 

You must issue tax invoices if the law applicable to you requires you to issue tax invoices.

2- Simplified Invoice

Simplified invoices are those that contain minimum details of the purchase, and they do not include the VAT amount specifically.

3- Proforma Invoice

It is an estimated invoice sent to the buyer to request payment before delivering the goods or services. These invoices help you send your estimate, and the buyers can agree to the quoted price. 

4- Debit/Credit Note

Debit/credit notes are sent when there is an adjustment, cancelation, or modification on the existing invoice. For example, you have already issued an invoice worth AED 500 for ten items. If the buyer returns two items, then you will have to issue a credit note

Tip: Never cancel or delete an invoice; instead, use debit/credit notes. It will help you keep track of your sales and streamline your accounting.

Now that we have covered the basics of issuing an invoice let’s understand how to issue it?

How to Issue an Invoice?

  1. Manual Invoices: You can have an invoice book that contains basic templates of invoices on each page to issue manual invoices to your customers. Many retailers used to issue invoices using this method.
  2. Printed Invoices: You can also prepare invoices in an excel or word file on your computer/laptop. Thus, you can issue these bills to your customers in printed or electronic format.
  3. Invoicing Software: You can also use invoicing software that will allow you to generate, issue, track and recover your invoices faster and more conveniently.

Get Paid Faster Through an Invoicing Software

Invoicing will be worth it if it can get you paid faster and more comfortably. When you issue manual and proforma invoices, they may get lost in transition, the details may not be clearly visible and you may miss certain details. 

Hence, issuing invoices using the software could be the fastest way to automate invoicing for your business. 

Advantages of Using an Invoicing Software

Let’s understand why you should use invoicing software to streamline your invoicing that will help you accurately record, generate, and store e-invoices in your software. 

Automated Invoicing

You can issue invoices automatically for which you just have to select a customer name and the amount for which you are raising an invoice.

Smart Tracking

You issue an invoice and forget; invoice collection, follow-up, and recovery are taken care of by the software through reminders and notifications. 

Easy Accessibility

Since the software uses the cloud to store invoices, you can generate, modify, and send invoices anytime from anywhere. 

Customized Invoices

Invoicing software stores multiple invoicing formats, and hence, you can select from varieties of formats and customize your invoices depending on the client.

Secured Payments

When you issue an invoice, you have documentary proof of your work, and it can help you get paid faster and safer. It can also allow you to offer multiple payment options to your buyers, such as card, bank transfer, etc.

secured-payments

Thus, the invoicing software can prove a one-stop solution for multiple tasks related to invoicing. For example, generation of invoices, issuance of invoices, storing invoices, and recovery of the invoices.